Failing Health Care Co-ops Will Cost Taxpayers

Consumer Operated and Oriented Plan Programs (COOPs) were really a political compromise between Members of Congress who wanted a public plan option and those who didn’t. Once the Affordable Care Act passed, COOPs had outlived their usefulness. However, they are now failing and will cost taxpayers plenty. Senior Fellow Devon Herrick testified before a congressional committee.

Summary and Conclusions

As this paper demonstrates, a benefit offset rate that tracks the realized rate of return on government bonds, rather than being set at a static rate, will increase the likelihood that workers’ returns on their personal retirement accounts will outpace the benefit offset.

"Using the realized government borrowing rate is in the spirit of the rationale for the benefit offset."

This paper addresses the frequency with which PRA accumulations fall short of those that would result from investing in a pure government bond account which represents the benefit offset amount. We follow Shiller’s recommendation that the benefit offset rate be computed using a market rate of return rather than a fixed 3 percent return. 18 Our treatment using the realized government borrowing rate is in the spirit of the rationale for the benefit offset, which is to repay the government for the loan provided to workers. We also report on a more aggressive life-cycle investment strategy and provide estimates based on simulated data.

In contrast to Shiller’s findings we find that:

None of the portfolios which include equities fall short of the benefit offset amount when we use unadjusted historical data, and thus provide net benefits to retirees.

Even when the historical stock returns are adjusted downward by reducing the average return to 4.8 percent, reflecting a substantial decline in the equity premium, we find that at most, 7.7 percent of the 91 overlapping historical time periods would produce negative net benefits.

NOTE: Nothing written here should be construed as necessarily reflecting the views of the National Center for Policy Analysis or as an attempt to aid or hinder the passage of any bill before Congress.